Steps Toward Lower Cost, Higher Quality Health Care

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No one seems to have a problem with shopping for the best price when it comes to a new computer or a car. But there's something about shopping for health care prices that seems different. It's also a lot harder. Prices aren't transparent. The L.A. Times reported earlier this month on the challenges individual patients can have in trying to find the best price.

At the same time, consumers have become more concerned about cost. According to the Kaiser Family Foundation, premiums for family coverage have more than doubled in the last ten years -- 113 percent -- and the share the worker pays of the premium is up even more -- 131 percent.

The cost of health care has been going up, faster than the rate of inflation. The federal health care overhaul takes aim at this problem and seeks to lower cost and improve quality of care at the same time. One program gaining traction is through focusing insurance design on value. For example, some plans reward healthy behaviors, such as quitting smoking or exercising regularly.

The California Public Employees' Retirement System-- or CalPERS -- is trying a different approach, one that looks at charges for a specific procedure across its entire population. And CalPERS has a big population of beneficiaries. It covers 1.6 million employees, retirees and their families. In 2008 CalPERS conducted an analysis of its claims database and learned it was paying $55 million a year in knee and hip replacements.

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Now, you might not think there would be much difference in the price for getting a knee or hip replacement across the state. But think again. CalPERS asked Anthem Blue Cross -- which manages its PPO plans -- to examine the range of prices for these operations in California.

Anthem came back with the startling information that CalPERS was paying $15,000 on the low end to $110,000 on the high end, a more than seven-fold difference from lowest to highest.

"So we started asking ourselves," Kathy Donneson, Chief of the CalPERS Heatlhy Plan Administration Division told me, "what are we getting from the $110,000 surgery that we couldn't get from the $15,000 surgery?"

That's when CalPERS turned to what's called a "value based purchasing" approach for elective hip and knee replacements, starting with its non-Medicare population. CalPERS set a threshold price of $30,000 for the hospitalization and device charges for these operations. That $30,000 is slightly higher than the average price CalPERS had been paying for a hip or knee replacement. Anthem identified 46 hospitals across the state which would do these operations at the threshold price.

Of course, it's easy to shop on price, but what about quality? Donneson says Anthem used a "quality scorecard" to select only institutions which could deliver a high level of quality. When the program launched in early 2011, Anthem's list included UC San Francisco and Stanford.

On January 1st of this year, Blue Shield started a similar program with CalPERS. Blue Shield has a process for awarding a "Blue Distinction" designation to hospitals that deliver "quality healthcare." In order to earn the designation, hospitals must show they have lower complication rates or hospital readmission rates, among other criteria.

"The bottom line is that this is the kind of healthy competition that has not existed to a great extent in health care before," Bill Kramer of the Pacific Business Group on Health told me. PBGH is a group of large employers working to improve health care quality and reduce cost.

CalPERS patients who choose one of these "threshold price" hospitals will pay only the deductible and copay for their hip or knee replacement. But if they choose a different hospital, they will have to pay whatever the differential is, out of pocket. If there's no hospital on the list within 50 miles of the patient's home, the patient is reimbursed for travel. But CalPERS wants to help its members avoid travel. "We do want enough centers so there isn't a long distance to travel," said Donneson. "That's why I'm working with both Anthem and Blue Shield to increase the hospitals on the list."

When CalPERS started the project, it was hoping for 16% savings. Donneson says a UC Berkeley team of health economists is working on an analysis of the 2011 claims which should be complete in June. Then CalPERS should know if their new approach is saving money.

In the meantime, we do know this: in the first half of 2011, Anthem Blue Cross received 246 claims for hip or knee replacement. A full 70 percent of those claims were below the $30,000 threshold price. The average price for operations done at hospitals on Anthem's list was $18,000 while the average cost for operations at hospitals not on the list was $34,000. And no one went to the hospital that charged $110,000, says Donneson. At the beginning of this year, CalPERS expanded its threshold pricing project to colonoscopy, arthroscopy and cataract surgery. The organization has no plans to add any other procedures next year. Just looking at cataract surgery -- the range for that procedure across the state was $1,600 to $8,000.

"The future is here," says Kramer. "We know some of the things that work, but it's not taken to scale yet. Pilots that work and spread them more quickly and more broadly -- that's the kind of thing that will drive system change and bring our costs down."

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Editor's Note: Friday's "The California Report Magazine" devotes its 30-minute program to health care costs. It includes an examination of premium costs at Kaiser Permanente, catastrophic health care plans and an innovative home hospice alternative in San Diego. You can listen here: